Bakery

October 20, 1998|By Sean Somerville | Sean Somerville,SUN STAFF

A federal judge allowed the family members holding 58 percent of Schmidt Baking Co. shares to assume four seats on a five-member company board yesterday, setting up a possible confrontation between two groups of the founders' descendants over the future of the 112-year-old Baltimore company.

Pete Smith, a descendant who is chief executive officer and holds the other 42 percent of the shares, had controlled the company under a three-year voting trust that expired in January.

At a court-ordered shareholders meeting yesterday, Smith sought to pre-empt the installation of the new directors -- by announcing his own moves: The expansion of the board from three to five members and the appointment of nonfamily members to the board.

At the same time, Smith awaited the results of an appeal of a September ruling by J. Frederick Motz, the chief judge in U.S. District Court in Baltimore, that prompted the shareholders meeting.

But yesterday Motz discounted those moves and the possible outcome of Smith's appeal, ordering the majority's slate of candidates to join Smith on a five-member board.

"I'm very disappointed," Smith said. "It's not good for the corporation. It's not good for the employees, or for the city. They're not interested in the future. They have no other goal but to sell the company. It's a shame. The greed that they have here is sickening."

Thomas Bowyer, Smith's first cousin, former Schmidt CEO and one of the new board members, said, "I have no comment." Others could not be reached for comment yesterday.

While it's not clear what will happen next, an imminent sale is unlikely. Pete Smith and his son Peter, chief financial officer, said they won't sell for any price. And Maryland law requires the approval of two-thirds of the shareholders.

"They don't have that. They have 58 percent," the younger Smith said. "I'm not going anywhere. My resolve is as strong as it's ever been."

Besides Bowyer, the new board members include Bowyer's niece Pam Dickson; Bowyer's nephew James Baldecchi; and William McCarthy, assistant vice president of FMB Trust Co., the administrative trustee of the Obrecht Trust, which was established for another branch of the family.

Founded in 1886 by Peter and Elizabeth Schmidt, Schmidt Baking Co. employs about 1,100 people, including 400 to 500 in Baltimore and the rest in West Virginia, Virginia, Pennsylvania, Delaware and the Washington suburbs. The company's brands include Sunbeam and Blue Ribbon.

James Gray, Smith's lawyer, said the company fell on hard times in the early '90s. Bankers and some shareholders in 1993 turned to Pete Smith, then director of operations, to replace Bowyer and turn the company around, Gray said.

At the same time, Pete Smith tried to buy enough shares to control the company but no one would sell, Gray said. The Obrecht Trust negotiated to give Smith controlling interest for three years starting in 1995, Gray said.

According to Gray, under Smith, the company went from a loss of $4 million in 1993 to a $5 million profit in 1997. Estimates of the company's value, Gray said, range in the tens of millions of dollars.

With the trust about to expire in the summer of 1997, Gray said, the Bowyer group started contacting Schmidt's competitors and suggesting the company would be sold. At one point, a suitor was prepared to offer sweetheart employment deals to Pete and Peter Smith, in exchange for agreeing to a sale, Gray said.

Smith's issuance of stock options to top managers prompted the suit against Smith by Dickson, in which she argued that the plan was unfair to shareholders. Motz blocked the plan and ordered the shareholder meeting.

Last week, with the meeting looming, a board member, Leonard V. Bunce, resigned. Smith appointed three new board members -- including a retired judge, a food industry executive and Smith's son Eric, the company's general counsel -- to join Peter Smith and himself on the board.

Yesterday, shareholders voted to oust Peter Smith from the board, and Motz's ruling displaced the other three Smith had appointed.

George Faulkner Ritchie IV, a lawyer representing the majority shareholders, told Motz at yesterday's hearing that Pete Smith was playing by his own rules. In ordering the new board members to be seated, Motz ruled that Smith's moves violated the spirit of his September board. "Clearly, everybody knew this meeting was about who would serve on the board," the judge said.